In today’s down market, many homeowners are reluctant to pour more money into their homes. Before deciding whether to replace a roof or merely patch it, homeowner’s should consider the tax implications.
Home improvements — a new bathroom or kitchen, for example — can increase the value of a home and reduce any taxes due on the profit earned from its sale.
Home repairs provide no immediate tax benefits to a homeowner. They are not tax deductible and they are not added to the home’s basis (cost), for tax purposes. As far as taxes go, they are a nonevent. Thus, a homeowner who patches a leaky roof gets not tax benefits.
Home improvements are very different, though. The cost of an improvement is not deductible, but it is added to the home’s basis for tax purposes. For example, the cost of adding a new roof to a home is added to its tax basis. This reduces any taxable gain when the home is sold.
Last week we explained how home improvements can provide homeowners with tax benefits when the home is sold because the cost is added to the home’s tax basis. In contrast, home repairs (there is an important distinction) provide no tax benefits at all.
However, if you understand and apply the rules, you can turn repairs into improvements for tax purposes.
Under what the Internal Revenue Service calls the “general plan of improvement” rule, an expense that is incurred as part of an overall plan of improvement, rehabilitation, or modernization constitutes an improvement — even though the same expense, standing alone, would be a repair.
For example, patching a roof would ordinarily constitute a repair, but it can be treated as an improvement if it is part of a general plan of improvement.
San Francisco Chronicle - When deciding which home improvements to make, many homeowners consider the amount of resale value the improvement may or may not make and compare that against the cost of the renovation. Homeowners concerned with making home improvements that will pay off when it’s time to sell the property, should consider the following tips.
Making sense of the story
- The first improvement/repair homeowners should consider are those that impact the home’s basic structures and systems. Potential home buyers generally do not want to face expensive repairs, and if items such as the foundation, roof, air conditioning, water heater, or other basic structure need to be fixed, the property will be considered a fixer-upper and its market price will be discounted accordingly.
- Some minor replacements will produce big results for minimal cost. Replacing and coordinating bathroom and kitchen hardware and fixtures are generally inexpensive, but tend to make a big difference. The same can be said for getting rid of any dated finishes, such as old wallpaper and brass light fixtures.
- Homeowners who don’t know when or even if they will be able to sell their home are advised to choose home improvement projects carefully. Unless the home is located in an upscale neighborhood and the property already is immaculate, owners can skip expensive upgrades – such as remodeled bathrooms – and focus on the fundamentals.
We see damage caused by termites in many inspections that go through this office. The newest edition of The Money Pit talks about early detection of these pests and now is the time to do something about them.
It’s termite swarm season, so now is the time to see if you can catch these sneaky and destructive pests before they head underground to make a meal of your home. Swarm season is the part of a termite’s life cycle where they fly off and reproduce. When this happens, you’ll either spot the swarm itself or find the clear wings termite swarms leave behind, typically near windows or on sills. Unfortunately, this is the only time you’ll even catch a glimpse of these little buggers. Termites typically enter your home in areas that are difficult to spot, like inside dark crawlspaces or basement. Other telltale signs of termite infestation include soft wood in the home, mud tubes in the interior or exterior of your home often near the foundation, and darkening or blistering of wood structures. But by the time you notice the signs of an infestation, the damage has most likely already been done. To avoid a surprise attack, have your home inspected for termite damage. An annual, professional inspection only costs about a hundred bucks and is the best prevention to avoid termites and other wood destroying insects all year long. Read more.
- Mick Orton
The San Francisco board of Realtors has put together a great website resource for homeowners. To quote:
The Association’s new web site for homeowners, www.sfbaywindow.com contains more than 130 articles on subjects important to owners. From “Adding a Room” to “Zoning Districts,” it’s all there, making the site the most robust resource guide for San Francisco homeowners on the web.
We will also have this link on our website. Take a look. We think you’ll be glad you did!
- Mick Orton
A reader asks:
We have wall to wall carpet in the bedrooms and on the stairway and are wondering if we should replace the carpet or put in hardwood floors. Which do you think is a better choice? We got the estimates for both, and hardood floors are much more expensive to have installed. Do you think we can recapture the cost of the hardwood floors when we sell?
Of all the flooring choices, hardwood floors can last the longest. In fact, the floors in many homes in San Francisco are now well over 50 years old and still look great. Plus, by reacting with air and sunlight, their appearance actually improves over time as they fade, or darken depending on the type of wood (as in cherry wood floors), to a very desirable patina. Hardwood floors can also be refinished and they are generally easy to maintain. And there are many choices when it come to the type of wood you use; from bamboo to cherry to pecan or the more common oak.
When it comes time to sell your home, hardwood floors are a major selling point and will increase the perceived value of your home substantially. According to realtors, hardwood can add 8% to 10% to the price of a house. In a $750,000 house, that means $60,000 to $75,000 more on the selling price.
- Janis Stone